When it comes to Technology companies, headcount reductions are rarely “one & done”. This used to be especially true of Bay Area Technology companies which are famous for lacking operating discipline (i.e. cost discipline). However, the Bay Area aversion to running profitable businesses has permeated the Tech sector over the past 12 years of easy monetary policy. CEOs that would once chuckle in meetings when asked about future profitability are quickly finding religion as the cost of capital has dramatically increased. Despite what the equity markets believe, we are not going back to zero percent interest rates tomorrow, next year, nor in 2024. Management teams that find cost discipline religion will have a leg up on those who keep their heads in the sand.
You can bet that Small, Mid and Large Cap Technology firms will execute round 1, 2 or 3 of headcount reductions depending upon where they are on the curve should demand remain soft and the cost of capital remain high for the foreseeable future.
- It is easy to imagine Meta (META) announcing further headcount reductions in April 2023. Google (GOOG) could do the same in April should the Ad market remain soft.
- One would expect Amazon (AMZN) and Wayfair (W) to reduce headcount after the Christmas shopping season ends (the latter company does not have much going for it beyond speculation that is ground in nothing more than a Fed pivot).
- I would expect Salesforce (CRM) to cut additional heads should the macro environment remain soft during calendar Q1 and certainly if the macro environment deteriorates as we expect.
- There will be a large cohort of lesser known Mid-Cap, Small-Cap and private companies that will execute layoffs. Many of these will not capture headlines, but will contribute to a softening demand environment.
- Hiring freezes, not back-filling for natural attrition and definitive headcount reductions have been going on all year across the Software space, particularly for those companies that carry debt. Not every company will file an 8K or talk publicly about these actions, particularly when the numbers involved are not significant, but at the margin they have a dampening effect on demand.
- 2023 is shaping up to be a fascinating year. I am less interested in where interest rates plateau next year and more interested in what investor behavior will be if the Fed is true to its word and holds rates at an elevated level for an extended period of time.
- The best investment strategy is always to find quality companies. That starts with identifying quality management teams. This type of active investment strategy will increasingly matter so long as interest rates remain above zero and as investors accept that interest rates are not going back to zero any time soon.